China and US: Two Peas in the Same Soup

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President Obama will soon welcome his Chinese counterpart, President Hu Jintao, to the White House and there is a lot at stake in the meetings for both sides. The press is full of speculation about what they will discuss and the symbolism of the visit. After months of tension and banter clearly the relationship needs work and the fact that the White House visit is happening signals recognition that the relationship is important to both sides.

As the meeting takes place among the issues under discussion will be North Korea and the equally looming nuclear threat from Iran. Chinese willingness to bring pressure on one or both of these states is a major objective of the US. But what is China’s objective?

The truth is China probably wants most for nothing bad to happen on the rest of President Hu Jintao’s watch as it prepares for a major change of leadership in 2012. Conflict with North Korea or an oil crisis sparked by conflict with Iran could hurt China’s delicate economic condition and threaten its continued growth. A big trade spat or conflicts over the value of the Yuan or trade imbalances cause uncertainty and risk neither party wants nor needs.

President Obama actually might have the same objective since the last thing he wants is a conflict with China over trade issues, deficits and China’s purchase of American bonds and debt allowing time for President Obama to reduce unemployment, increase economic growth and position Americans to feel more confident about their future by 2012.

There are also unspoken issues and undercurrent at stake too. The huge American deficits and the President’s spending on health care, stimulus and other Democrat aspirations cost his party their majority in the US House of Representatives and may threaten his own reelection if he cannot get it under control and off the front page. For that President Obama needs jobs growth and tax revenue growth. Just this week, Moody’s and S&P announced that they were putting US debt under credit review because of the looming deficit. A group of noted economists gathered in Cambridge, Massachusetts this week and one, MIT’s Simon Johnson said bluntly that the damage from the financial crisis and its aftermath have dealt U.S. prominence a permanent blow and he expected the Chinese Yuan would be the world’s reserve currency within two decades.

But before we starting paying Professor Johnson’s salary in Yuan let’s not forget the Chinese have their own problems and like everything in China these days they are huge. Washington may have huge deficits to work down, but China has an economic miracle that must continue to be miraculous or else, if I may paraphrase STRATFOR. And while we all know that economic growth can go down as well as up, the Chinese just cannot afford for it to go down too much or too fast without creating an existential risk to the Communist Party and to China’s economic transformation from third world to first world country. No pressure, right. Frankly, I’ll take our US problems any day over the fractious political, ethnic and economic problems facing China.

And if the Chinese bubbles start bursting too much or too fast they have consequences for America and the rest of the world no one really wants to face.

China has another strategic issue it has tried to avoid in the balancing of its aspirations for regional and global leadership and the fears that causes among its neighbors Japan, South Korea and the Southeast Asian “Tigers.” If China becomes a bigger military as well as economic threat to its neighbors it risks setbacks for its exports everywhere in the world with unpleasant consequences at home. So far China has pushed forward and tacked back just enough to maintain a prudent course but China’s export-based economic model is vulnerable since it depends upon good relationships with the major economies of the world to make a welcome home for its exports and continue to send their money to Beijing. Government investment drives the Chinese economy, but Beijing is walking a very difficult path must continually balance the risk of run-away inflation and rapid economic decline. Hu Jintao does not want a big screw-up to happen on his watch in advance of the 2012 leadership changes planned.

The problems China faces are ironically the same ones faced by American leaders. How do we deal with these pressing structural and economic issues without creating political problems for our parties and protests from our citizens? Procrastination makes the problems worse, potentially, for both the US and China. Hu Jintao still has control of his party but not necessarily the geo-political or economic events that could cause ‘bad things’ to happen. President Obama faces a divided Congress and Republican opponents eager to upset him for re-election so like it or not he will be forced to accept actions to cut spending and reduce the intrusive influence of government over the next two years.

My view longer term is this:

America is not as weakened or humbled at Professor Johnson states, and the genius of our country has been its resilience and ability to adapt to change. Don’t count America out. Besides, while the nations of the world love to complain about America we are still the safe haven for their investments, the world’s best markets for their products, and the only country capable of projecting military power anywhere in the world in the defense of our strategic interests and our allies.

China is not as strong as its current growth rates suggest nor does it have the staying power to be either the world’s reserve currency or its global leader. This is not a slight to the miraculous growth of China or of its potential. But a global super power must be confident at home before it can be taken seriously abroad. China may well get there but it will require more than export growth and a big pile of cash to spend. It requires much more than that. If China can create a soft landing from its miracle and a sustainable pattern of reasonable growth long term that will be a singular achievement worthy of a great nation, but it is not sufficient to overtake the US.

The good news is both China and the US benefit from their relationship, share major strategic goals, and working together have the power and strength to secure their long term economic interests without disadvantaging the other.